What Is An Alternative Mortgage Lender?

An alternative mortgage lender is a home loan provider that isn’t a traditional bank. For borrowers, this means that if you can’t get a mortgage through a bank, there are other options you can pursue.

Examples of alternative lenders

There isn’t an official definition of “alternative lender,” and some people may use the term to mean different things. For example, some people may consider smaller, regional banks to be alternative lenders. The important point to remember is that “alternative lenders” captures a wide range of lender types, including:

An alternative to what?

The common thread among the lenders above isn’t what they have in common but what each is not: a big bank. In contrast, Canada’s big six banks have national footprints and are behind three out of four mortgages.

Banks are also heavily regulated by the Canadian government. That isn’t to say alternative lenders don’t have any regulations: Credit unions, unlike banks, are usually regulated by provinces, which might have less stringent regulations than those governed at the federal level. But alternative lenders often have more flexibility with their eligibility requirements.

For instance, banks and other financial institutions regulated by the Office of the Superintendent of Financial Institutions must ensure applicants meet the mortgage stress test. Lenders outside that regulatory umbrella aren’t bound by those same requirements. Also, if you’re borrowing from a bank, your credit score must meet government-mandated minimums: Some alternative lenders aren’t subject to enforcing those minimums.

Who can benefit from using alternative lenders?

Low credit scores or limited credit history are common reasons you might turn to alternative lenders. But those aren’t the only situations where alternative lenders can help.

You might also turn to an alternative lender if:

You’re looking at an unusual property or location. For example, it may be harder to find a mortgage with a traditional lender in a highly rural location or if a home needs major renovations.
You’re in a hurry. If a buyer wants to close as quickly as possible — if, for example, financing through a bank fell through before closing — an alternative lender may be able to move paperwork through quickly.
You have an unusual income pattern. Freelancers or business owners may not have straightforward salaries or income documentation.
You want a very short term loan. Perhaps there’s a gap of a few months between buying a new home and selling a current one.
You need a niche type of mortgage. Reverse mortgages are one example.

Downsides to using alternative mortgage lenders

There’s a simple explanation for why banks avoid many of the situations described above: They’re riskier.

Alternative lenders often exist because they can tolerate higher levels of risk or because they specialize in a particular type of lending or geographic area. Of course, risk increases the cost, which borrowers pay in the form of higher interest rates. Those interest rates drive up the monthly payments and lead to a higher overall lifetime cost of the loan.

Higher costs are the most obvious downside of alternative lending, but there are other possible downsides to consider, too. The Financial Services Regulatory Authority of Ontario says borrowers should be fully aware of fees and penalties before committing to a mortgage from an alternative lender, which might be more severe than those found in bank mortgages. It suggests asking questions like:

What would happen if you miss a payment? How quickly could you lose your house if you fell behind on payments?
What are all the costs and fees you can expect to pay at closing, during the loan and at renewal?
Are any fees ever due before you close?

These questions don’t imply that alternative lenders behave unethically. Instead, the absence of federally-enforced monitoring means you may need to be your own advocate.

How to find alternative lenders

Compared to searching for banks, it might be difficult to find an alternative lender that fits your needs. Alternative lender brands aren’t as well known as national banks, so it can be hard to know where to start. And once you start searching, you may find it difficult to sift through dozens of options, especially if a lender website doesn’t offer much information online compared to banks.

Start by asking for referrals from people you trust. A bank you’ve worked with — even one that couldn’t offer you a mortgage — may have referrals to trusted alternative lenders. If you already have a real estate agent, ask for a few potential lenders to contact. Mortgage brokers, in particular, will have access to a wide range of mortgage types. Whether you’re seeking an alternative lender or a traditional lender, you’re more likely to get the best results if you contact more than one lender.

Finally, consider what your goals are after the term of your mortgage expires. If you have a low credit score, will the lender offer a renewal? If you improve your credit, what steps would you need to take to move to a new lender? Of course, alternative lenders might be the best choice for other reasons, even if you have great credit. Whatever your situation looks like, thinking through your long-term mortgage needs and options could help guide your decision.

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